Estimating the Value of Absolute Power: Evidence from Criminal Justice Process Events on Controlling Shareholders in Large Business Groups

Abstract

This paper estimates the impact of criminal justice process, mainly the indictment and conviction of controlling shareholders duty, on the market value of a firm. The indictment or imprisonment of controlling shareholders in Korean large business groups, chaebols, provides an opportunity for analyzing the absence of the real boss. Our main findings are as follows. First, the conviction relating to controlling shareholders generally do not have a significant group-wide effect on the value of firms. The portion of firms that receive a positive impact and a negative impact from having a controlling shareholder being sentenced guilty almost equivalent (44% versus 56%, respectively). Second, even in the case of imprisonment at the final trial, we are not able to find a significant effect on the value of firms. The real absence of a boss does not really matter. Third, prosecutors’ raiding the company, which is generally the first media exposure for the crime, does not have a significant effect, but that event conditional on ex-post pre-trial detention does have a negative effect. Fourth, pretrial custody, controlling shareholders being jailed, at the early stage of criminal justice process, has a negative effect on the value of firms. Finally, the effect of conviction on affiliated firms within the same business group is asymmetric. For instance, such decisions have a positive effect on affiliates where a controlling shareholder holds a large proportion of the shares and a positive effect at the firms with higher stock return volatility; however, they have a negative impact on affiliates thought to be more likely to grow at faster rates in the future. For this reason, sentencing of the controlling shareholder itself induces unintentional value transference between the different affiliated firms in a given company group.